When disputes arise between private investors and foreign states, investors often distrust foreign courts to resolve the disputes impartially. Accordingly, many investment treaties – which are designed to facilitate bilateral investment – provide specific enforcement mechanisms for dispute settlement, including arbitration. One such arbitral forum is the International Centre for Settlement of Investment Disputes (“ICSID”), which was created in 1966 in consideration of “the need for international cooperation for economic development, and the role of private international investment therein.” When enforcing an investment treaty in an ICSID arbitration, the terms of the treaty control. One such term is an “in accordance with laws” provision, which often will come acutely into focus during the jurisdictional phase of an arbitration. In this context, a plaintiff makes a claim, and the defendant argues that the tribunal lacks jurisdiction because the investment was illegally made under the laws of the host country. Similarly, a tribunal will not hear a case that is “created in violation of national or international principles of good faith.” Consequently, when corruption occurs during international investment contract formation, this issue often arises.
As a result, many critics have argued that the international investment arbitration framework, including ICSID’s framework, inadvertently incentivizes state corruption. As these critics point out, ICSID arbitrators have never reached the merits of a case involving corruption; thus, states can immunize themselves against arbitral judgments by preparing in advance a corruption defense. By asserting this defense, a state may avoid liability, even for willfully violating an investment treaty.